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Business Basics in Brazil

Big opportunities, challenges go hand in hand.

Brazil
is a nation rapidly on the rise. In 2010, the country’s economy grew
7.5%, making it the seventh-largest in the world, according to the
World Bank. In 2011, Brazil’s GDP is expected to grow 4.5%, slower
than last year but still a healthy pace. And growth over the next
few years also is projected to be robust as the country gears up to
host two blockbuster events—the 2014 World Cup and the 2016 Olympic
Games—that require huge investments in urban infrastructure, such as
airports and public transportation.

With
its large, expanding domestic market (the fifth most populous in the
world, with a substantial middle class), wealth of natural resources
and stable democracy, Brazil is a thriving destination for foreign
investors. According to the United Nations Conference on Trade and
Development, Brazil ranked fifth among all countries in foreign
direct investment inflows in 2010, rising from 15th the year before.

In
recent years, reported The Economist, “Brazil has been
transformed from ‘country of tomorrow’ to ‘once-in-a-lifetime opportunity.’”

Despite
these bright prospects, however, Brazil remains a complicated place
to do business for foreign-based companies. Challenges include a
highly complex and expensive tax and labor environment, burdensome
bureaucracy, costly credit, lingering corruption and deep social
imbalances. On the World Bank’s Doing Business Index, Brazil
ranks 127th among 183 countries in the ease of doing business, which
it defines as having a regulatory environment that is conducive to
the startup and operation of a local company.

To
gain insight into emerging opportunities, the JofA asked two
top accountants with direct experience in Brazil to provide their
perspectives about the country’s business and accounting
environment. Sharing their views were Eduardo Pestarino, regional
executive for The Americas at Crowe Horwath International; and José
Bendoraytes, managing partner of Horwath Bendoraytes Aizenman &
Cia., a member firm of Crowe Horwath International in Brazil. Their
answers are presented jointly.

LEGAL / REGULATORY

JofA:
What are the available forms of organization for a U.S. investor
to do business in Brazil?

Pestarino/Bendoraytes: A
foreign company can apply to open branches in Brazil by submitting
an application to the Brazilian government. There are several
formalities that have to be fulfilled, including the filing of
documentation with the National Department of Registry of Commerce
(DNRC). The process of registering a new business can be lengthy,
since it involves as many as 15 different procedures. Foreign
companies must appoint a representative (who does not need to be a
native Brazilian but must be a resident in Brazil) to act on their behalf.

The
two main types of business organizations in Brazil are the limited
liability company (LTDA) and the corporation, known as “Sociedade
Anónima” or “SA.”

The
LTDA is the simplest, least expensive and most popular form of
organization in Brazil. It is similar to U.S. limited liability
companies, limited partnerships and closely held companies. At least
two partners are required to form an LTDA.

The
Brazilian corporation resembles a U.S. corporation. It also must
have at least two shareholders, who are liable only to the extent of
the stake they hold in the company.

A
Brazilian corporation may be publicly held or closely held. A
publicly held company must be registered at the Comissão de Valores
Mobiliários (CVM, Brazil’s version of the SEC), along with the
securities it issues, which may be traded on the stock exchange or
on the over-the-counter market. The securities of a closely held
company are not available to the general public.

At
this point in time, Brazil only has around 1,000 public companies.
Most of the country’s 6.2 million businesses are small and
medium-size enterprises.

JofA:
What do companies need to understand about protecting
intellectual property in Brazil?

Pestarino/Bendoraytes:Since
1994, Brazil has been a signatory of the World Trade Organization’s
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement. TRIPS establishes a minimum protection standard to
property rights and requires signatory countries to review and adapt
national laws that meet that standard.

Over
the years, Brazil has issued several property rights laws that
assure protection to the holders of industrial property rights.
These laws prevent others from producing, using or selling products
or providing services that infringe patents, trademarks, industrial
designs or secrets. These laws also protect the intellectual
property rights relating to the development of new plant varieties,
recognizing Brazil’s rich biodiversity and the high costs of
research and development.

Software
property rights also are protected for 50 years in Brazil, and
authors—both domestic and foreign—have copy rights protected for 70 years.

While
there are still areas of concern, particularly with respect to
pirated audiovisual goods, pharmaceuticals and medical devices, much
progress has been made in intellectual property protection.

JofA:
How effective is Brazil’s legal system, and can companies get
disputes resolved fairly and within a reasonable amount of time?

Pestarino/Bendoraytes:Brazil’s
legal system is effective, and companies can expect fair resolutions
of disputes. Although effective, the system is slow as a result of
legal instruments used by the attorneys to delay judgment and final
sentences and force unappealing decisions. For that reason, the
majority of international contracts entered into in Brazil have a
provision relating to arbitration procedures.

JofA:
What are the key aspects of the local labor environment to consider?

Pestarino/Bendoraytes:Brazil’s
labor system is complex and costly. It is governed by the CLT
(Consolidation of Brazilian Labor Laws), and its principles are
grounded in the country’s federal constitution, which makes changes
extremely difficult.

Compared
to the United States, Brazilian labor law involves a high level of
state intervention. For example, while American labor law allows
employers and employees to set labor agreements and use private
arbitration for disputes, Brazilian disputes always end up in a
court of law.

It
is not uncommon for Brazilian companies to have an extensive written
contract with employees. Additional costs for workers, such as
taxes, health insurance, meal and grocery stipends, transportation
stipend, vacation pay and a “thirteenth salary” (an additional
month’s pay every December) can add up to more than 70% of base pay.
Laying off employees also can be expensive. An FGTS (Unemployment
Compensation Fund)-opting employee unfairly dismissed is entitled to
withdraw the total deposits made by the employer in his FGTS
account, plus interest, monetary adjustment and a 50% fine figured
on the total amount deposited. Collective employment conventions may
provide for an additional indemnity.

JofA:
Can you share some basics on Brazilian currency laws?

Pestarino/Bendoraytes:Brazil’s
currency, the real, is nonconvertible, so it is not available for
trade on the forex market and cannot be bought or sold outside Brazil.

The
Banco Central do Brasil maintains close control of the Brazilian
currency market through Sisbacen, the Central Bank’s information
system. The system functions as a virtual environment where currency
transactions and operations are officially authorized and conducted.

Import
and export operations must follow specific rules with regard to
currency transactions. They include preparing contracts, documenting
transactions and getting approval from Sisbacen. Almost all types of
currency operations can be handled through a commercial bank or by
local exchange brokers.

JofA:
How is Brazil’s transition to IFRS progressing? What are the key
challenges and benefits?

Pestarino/Bendoraytes:In
2007, Law 11,638 was enacted, and Brazil fully committed to the IFRS
convergence process under the direction of the CPC (Accounting
Pronouncements Committee), an offshoot of the CFC (Federal
Accounting Council), the main accounting authority in Brazil. The
CPC has issued more than 40 pronouncements relating to convergence
since that time.

In
December 2010, the CFC instituted the standards issued by the CPC as
mandatory for all types of organizations, including:

Large
enterprises and listed companies, defined as any national or
foreign company that has more than R$240 million (US$151
million) in assets or more than R$300 million (US$189 million)
in revenues.

Regulated
organizations, including banks, insurance companies and
investment funds, which must also follow the rules issued by the
CVM, the Central Bank and SUSEP (Superintendência de Seguros
Privados, a division of the Ministry of Finance that regulates
insurance).

Small
and medium enterprises (SMEs).

Foreign-owned companies.

Training
is the main challenge relating to IFRS implementation, because the
adoption of principles-based standards requires a change of mindset
and approach. For example, the previous Brazilian accounting system
was designed to provide information to tax authorities, while IFRS
is intended to serve investors. The IFRS rules also are less
detailed and, as a result, generally require a higher level of
professional judgment. Emphasis is given to the “substance” of
transactions rather than simply the legal “form.”

The
benefits in adopting IFRS in Brazil include reduced complexity,
greater transparency, comparability and efficiency.

TAX

JofA:
Could you provide an overview of Brazil’s tax compliance and
reporting system?

Pestarino/Bendoraytes:The
Brazilian Constitution attributes taxing powers to federal, state
and municipal governments. Brazilian taxation may take the form of
taxes, fees, betterment fees, other contributions and compulsory
loans (see Exhibit
1 for a list of the main types of taxes in Brazil).

The
federal tax administration agency in Brazil is the Receita Federal
do Brasil (RFB or Brazilian Revenue Service). The Brazilian Revenue
Service is also in charge of inspection activities and the
collection of
social security contributions. States and municipalities also have
their own tax administration agencies.

Corporate
taxpayers are subject to corporate income tax (IRPJ) and social
contribution on net profits (CSLL) tax, which finances social
programs. In addition to IRPJ and CSLL, the federal government
levies taxes on foreign trade (import and export taxes), a
value-added tax on industrial production (IPI) and a tax on
financial transactions (IOF).

The
federal government also imposes social contributions on the gross
income derived by resident legal entities (PIS and COFINS
contributions). There is also a federal contribution imposed on
crossborder payments of royalties and certain technical,
administrative and scientific services (CIDE, or Contribution on
Economic Activities).

In
addition, state governments levy a value-added tax (ICMS) on the
distribution of goods and services. The ICMS is payable at all
stages of the chain of sales, from the manufacturer to the end
consumer. Municipal governments also levy a tax on services (ISS)
provided by a company, contractor or professional.

The
Brazilian tax system is complicated and time-consuming. The World
Bank calculates that it takes a typical limited liability company
that is domestically owned with 10 to 50 employees nearly 2,600
hours per year to comply with tax regulations in Brazil, compared to
187 hours in the U.S. And the average Brazilian company pays about
69% of its net profits to the government, compared to a total tax
rate of 46.8% in the U.S., according to the World Bank.

JofA:
Can you explain the difference between the “actual profit
regime” versus the “presumed profit regime?”

Pestarino/Bendoraytes:Under
the actual profit regime, companies calculate annually or quarterly
their income tax liability on net profits for the taxable period,
adjusted by additions and exclusions provided by tax law.

Certain
companies are required to calculate their income tax liability under
this regime, including those with total gross income in the previous
year exceeding R$48 million (US$30.2 million); financial
institutions, insurance companies and similar entities; and legal
entities that derive profits, income or capital gains from abroad.

Corporate
income tax (IRPJ) is due at the 15% rate on net profits. The portion
of net profit that exceeds R$240,000 (US$151,000) per year is
subject to an additional income tax of 10%. The social contribution
on net profits (CSLL) is imposed at a 9% rate.

Companies
that are not required to adopt the actual profit regime may
calculate their tax liability under the presumed profit regime. This
is a simplified tax method under which the company chooses to
calculate its taxable base by applying a percentage of its total
gross income earned during the quarter (presumed profit). The
applicable percentage ranges from 1.6% for income from the sale of
fuel and natural gas to 32% for income from the rendering of
services, such as factoring and real estate rentals. Sales of goods
are taxed at 8%. Income tax is imposed at the rate of 15% on the
presumed profit, with additional taxes that include CSLL.

JofA:
What is the rationale behind the transitional tax regime
that was created in response to the implementation of IFRS?

Pestarino/Bendoraytes:Provisional
measures established the RTT (Transitory Tax Regime) in 2009 in
order to neutralize the impact of new IFRS accounting methods, given
that pre-IFRS tax rules still apply in the country. Under the RTT
regime, companies can calculate their main federal taxes on the
basis of accounting rules in force until December 2007 (when the
transition from the former Brazil GAAP to IFRS began). This approach
will continue until a new tax law that considers the current Brazil
GAAP effects is issued.

JofA:
Are there financial and tax incentives available for foreign investment?

Pestarino/Bendoraytes:The
Brazilian government encourages long-term investment through its tax
system. Aside from tax and financial incentives granted at the
federal level, state governments and municipalities also make grants available.

The
most important incentives include:

Reductions
on import tariffs or tax deductions for imported capital goods
not available locally.

Special
Regime for the Acquisition of Capital Goods by Exporting
Enterprises (RECAP), which suspends taxes on new machines,
instruments and equipment imported by companies that commit for
a period of three years to export a certain level of goods and
services.

Incentives
for technological innovation.

JofA:
Have there been any recent developments on the tax scene?

Pestarino/Bendoraytes:In
August, President Dilma Rousseff announced a plan to provide R$25
billion (US$16 billion) in tax breaks over the next two years to
protect manufacturers from a surge in imports from China fueled by
the rising value of Brazil’s currency. The plan also eliminates a
20% payroll tax on four industries, including shoes and software. A
portion of the tax cuts will be offset by an additional tax that
these companies will pay on sales.

TRANSACTIONS

JofA:
Are there restrictions on dividends and other fund flows out of Brazil?

Pestarino/Bendoraytes:There
are no restrictions on remittances of dividends out of Brazil to
shareholders domiciled abroad. Dividends paid out of profits are not
subject to withholding tax or income tax.

Interest
and royalties are subject to withholding tax—royalties at a 15% rate
and interest at a rate of 15% to 25%. Remittances of royalties and
fees through the official market to foreign licensors are generally
limited to 1% to 5% of sales. The maximum amount deductible on the
remittance is 5% of net receipts from the product manufactured or sold.

The
remittances of profits must be registered at the RDE (Electronic
Declaratory Registration). The foreign funds registered at the
Central Bank of Brazil can be repatriated without previous authorization.

JofA:
What does a company need to understand about
transfer-pricing regulations in Brazil?

Pestarino/Bendoraytes:Brazil
is not a member of the Organisation for Economic Co-operation and
Development (OECD), but it has its own regulations on transfer
pricing, including a convention to avoid double taxation. Brazil has
no treaty to avoid double taxation with the U.S. Brazilian law
considers that companies are related when they are under a common
control, and transfer-pricing rules apply when one of the parties is
located in a country that provides a privileged tax regime.

When
products are imported by a Brazilian company, transfer-pricing rules
verify whether the company is making excess payments to the foreign
supplier. To that end, certain deductibility limits apply to
payments made by the Brazilian company to its foreign supplier. Any
amounts above such limit are added to the company’s taxable income.

As
for exports, the Brazilian tax authorities check whether prices are
not lower than those determined by comparability methods. The
Brazilian company must report a minimum taxable income when selling
goods and providing services to foreign-based related companies.

Calculation
methods specified by the regulation on imports include:

PVL—Market
sale price minus profit

PRL—Market
resale price minus profit

PIC—Market
resale price

CPL—Cost
plus profit

Calculation
methods for exporting goods and services include:

PVEX—Export
sales price

PVA—Wholesale
sales price minus profit

PVV—Retail
sales price minus profit

CAP—Acquisition
cost plus profit

To
qualify, a company must choose one or more calculation methods,
prepare a study in order to demonstrate related-party transactions
and transfer-pricing calculations, and then disclose this
information in its annual tax return. Adjustments can be done until
five years from the filing date. Disputes are common due to the
complexity of the law.

JofA:
What are the rules for tax loss compensation in Brazil?

Pestarino/Bendoraytes:Tax
losses may be carried forward and offset against pretax income up to
an annual limit of 30% of that income. Nonoperating revenue and
losses, subject to identical limits, must be controlled separately.

JofA:
What are some basic strategies for managing exchange rate risk?

Pestarino/Bendoraytes:The
basic strategies to manage exchange rate risks in Brazil are similar
to those used all over the world. Companies are subject to exchange
rate fluctuations that can impact profitability and cash flows. But
this currency volatility usually can be managed through derivatives,
especially hedge contracts.

The
most common contracts are future, forward, options and swaps.
Operations with derivatives can be done through major banks. The
main Brazilian provider of this type of financial services is
BM&F-BOVESPA, the Brazilian stock exchange.

In
late July, the government took steps to curb foreign exchange
speculation in an effort to reduce the Brazilian real from a 12-year
high against the U.S. dollar. The government imposed a 1%
transactions tax on currency derivatives and introduced new
legislation that would enable the tax to be increased up to 25%. The
legislation could impact hedging costs, according to analysts, since
many companies buy Brazilian currency in the futures market to
balance out their U.S. dollar exposure. According to the government,
the measure is directed at speculators and would leave genuine
hedgers unaffected.

JofA:
How difficult is it to sell a Brazilian company?

Pestarino/Bendoraytes:The
merger-and-acquisition market has been heating up. There are no
requirements imposed by the government to sell or buy a business,
unless a transaction interferes with the concentration levels of a
specific market as defined by CADE (Administrative Council of
Economic Protection). However, some M&A factors such as goodwill
recognition can entail tax adjustments that must be disclosed and
submitted to tax authorities.

Companies
are constantly searching for good investments in Brazil. As a
result, there are always good opportunities to sell businesses.

Capital
is most commonly repatriated through the sale of shares. A foreign
investor’s capital gain on a sale to a local resident is the excess
of the sale price over the foreign capital registered with the
Central Bank. That gain is subject to a 15% withholding tax.

BUSINESS ENVIRONMENT

JofA:
What are some basics that Americans need to understand about
Brazil’s business culture?

Pestarino/Bendoraytes:Americans
interested in doing business in Brazil need to recognize the
importance of developing good relationships, which takes time.
Everything isn’t all business, even during meetings, where the
ability to discuss popular topics such as soccer, literature,
culture or your hometown is very useful to “break the ice.”

Punctuality
is not as important as in other cultures, so 10- to 15-minute delays
can be expected for meetings. Interruptions, particularly at the
highest levels, are common. So it is advisable to demonstrate
patience.

The
most common type of hierarchy in Brazil is vertical. Decisions
usually are made at the highest level, but relationships between
individuals are as important as any organizational chart.

An
effective, personal style of management is valued as highly as
strong technical skills. Employee loyalty often depends closely on a
manager’s personality and ability to relate to people.

Other
good tips: Provide documentation translated to Portuguese when
possible, and never mix up Portuguese with Spanish. And recognize
that Brazil is a diverse country with 26 states and one federal
district. Customs and communication styles can vary greatly from
region to region. Much of the current economic activity is centered
in the south and southeast regions, so those are important regions
to get to know. But “one size fits all” definitely won’t work in Brazil.

JofA:
Is government “red tape” or bureaucracy a challenge? How about corruption?

Pestarino/Bendoraytes:Beyond
the standard costs related to the establishment of an enterprise in
Brazil comes “Brazil’s Cost”—a term used to describe all the
difficulties associated with red tape, corruption, elevated interest
rates, burdensome taxes and an inefficient labor law.

A
study issued by the ABIMAQ (Brazilian Association of Machinery and
Equipment Producers) measured the “Brazil’s Cost” for eight
agricultural and machinery products. The research found that
“Brazil’s Cost” raises the price for these products by 36% on
average, when compared to the U.S. or Germany.

Some
aspects of doing business in Brazil involve very bureaucratic
procedures that are burdensome. To succeed, it is very important to
have skilled, locally based legal advisers and accountants in place
before setting up a business in Brazil.

JofA:
What is the commercial lending environment like?

Pestarino/Bendoraytes:Credit
is currently abundant in Brazil, but interest rates are extremely
high compared to the U.S.

The
Brazilian banking system is very conservative, and borrowing money
can be difficult in cases where no real guaranties are available.
Many American companies looking to do business in Brazil face this
situation because, even when they are financially sound in the U.S.,
they do not have local assets to offer as collateral.

JofA:
How does trade credit work in Brazil? What are the standard
terms and conditions of buying and selling?

Pestarino/Bendoraytes:Trade
credit is vital for the survival of the companies in the Brazilian
economy. This arrangement is probably the most important source of
capital for business in Brazil.

The
most common trade credit occurs between industry and commerce or
among other B2B groups, when segments define their own terms and
conditions for buying and selling, according to current market conditions.

Partnership
and trust among parties establish the foundation for a good
financial relationship, but in cases of new business relationships,
organizations like Serasa Experian play an important role. They
provide access to a large database of credit information that helps
companies in their decision-making process.

Large
companies concerned about developing and protecting their supply
chains also have begun offering credit directly to key business
partners. For instance, Petrobras (a Brazilian-based multinational
energy company) provides competitive lending to its suppliers.

JofA:
What are the leading professional organizations in Brazil?

Pestarino/Bendoraytes:Accountants
are regulated by Conselho Federal de Contabilidade (CFC, or the
Federal Accounting Council), through each regional entity for each
state. Auditors are regulated by Instituto dos Auditores
Independentes do Brasil (IBRACON, or the Institute of Independent
Auditors of Brazil). Both the CFC and IBRACON are full members of
the International Federation of Accountants.

JofA:
Have your U.S. clients who have opened operations in Brazil made
the money they expected?

Pestarino/Bendoraytes:Our
U.S. clients doing business in Brazil are happy with their results.
They have reached their goals since they set reasonable projections
for their return on investment and took the time to learn about
Brazilian culture.

We
are currently facing an appreciation of the Brazilian real vis-à-vis
the U.S. dollar. This makes initial investments more costly but also
provides higher profitability and dividends in return.

Gary
James is
a former JofA
senior editor. To comment on this article or to suggest an idea
for another article, contact Kim Nilsen, executive editor, at knilsen@aicpa.org or 919-402-4048.

Accounting, Auditing Groups Aim to Raise Profession’s
Profile

Brazil’s
two major accounting and auditing organizations are working to
raise the profile of the profession domestically and
internationally.

Accounting
is a growing profession in Brazil, said Juarez Domingues
Carneiro, president of Conselho Federal de Contabilidade (CFC,
or the Federal Accounting Council), which oversees the
accounting profession in Brazil. The country is home to 493,000
accounting professionals, and 78,000 accounting organizations
are registered with the CFC and nearly 1,200 higher-education
institutions teach accounting in the country.

The
CFC, through its 27 regional councils of accounting, “has worked
hard to enhance and dignify” the profession’s role in society,
he added.

IBRACON
(the Institute of Independent Auditors of Brazil), which is
celebrating its 40th anniversary this year, also is striving to
enhance the image of Brazil’s auditing profession through a
major new communications initiative, said Ana Maria Elorrieta,
president. “We are highlighting the importance, relevance and
excellence of the profession.”

Another
goal of the effort, she said, is to make the public aware of
“how much the profession can contribute to the sustainable
development of the country.”

U.S.
companies thinking of doing business in Brazil should keep in
mind the deep pool of talented accountants and auditors the
country has, Elorrieta added. “We have a significant number of
professionals who are well prepared to work with them on their
projects.” (For more insights into Brazil’s transition to IFRS
and other hot topics, click
here for two video interviews with Elorrieta).

The
implementation of IFRS by Brazil will create new business
opportunities for the country’s huge base of small and
medium-size enterprises (SMEs) in the years to come, according
to the CFC’s Carneiro.

“Brazil
finds itself in a process where the growth opportunities (will)
open up in the international market,” Carneiro said. “The
benefits (of IFRS adoption) are many, including reduction of
complexity, greater transparency, comparability and
efficiency.”

In
Brazil, where the overwhelming majority of companies are micro,
small and medium-size enterprises, entrepreneurs are becoming
increasingly aware of the importance of complying with
international standards, Carneiro said. To ease the transition
to IFRS, both the CFC and IBRACON have been conducting training
seminars for local companies and professional associations
throughout Brazil.

“The
adoption of IFRS for SMEs (International Financial Reporting
Standard for Small and Medium-sized Entities) will migrate from
a situation of informality to a standard high level of
accounting transparency,” Carneiro said. “The great challenge
reserved for the CFC is now running the training (for the) SME
market and for the thousands of professionals registered in the
regional councils.”

Established
in 1946, the CFC is charged with promoting the development of
the accounting profession, registering and supervising the
nation’s accounting professionals and organizations, and
striving for ethics and quality in service delivery.

In
addition to its current work on IFRS, other key CFC projects
include Accounting for Success, an education program aimed at
giving accountants better tools with which to help their clients
survive and prosper; and GLASS (Group of Latin American
Accounting Standard Setters), a new cooperative effort involving
South America and the Caribbean. Carneiro was selected to chair
the first board of the group, which was formed June 28 of this
year.

The
CFC also is working on a joint project in Angola and Mozambique,
contributing to the development of accounting in those
countries.